JUMP IN BIG CHINA BANKS’ INCOME

Resilient growth and govt campaign against excessive leverage help lenders curb bad loans, boost margins

RESILIENT economic growth and a government campaign against excessive leverage are helping China’s largest banks, curbing their bad loans and underpinning their net interest margins.

Those factors helped the four biggest banks post higher-thanestimated second-quarter net income, led by Bank of China Ltd’s (BoC) 23 per cent surge, the biggest increase in six years.

Bigger rivals Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB) and Agricultural Bank of China Ltd (AgBank) posted an average gain of 3.5 per cent, according to figures derived from first-half earnings reported to Hong Kong’s exchange on Wednesday.

Their shares fell in Hong Kong as investors locked in profits from the stocks’ rally since early July, said brokers. ICBC dropped 2.3 per cent as of 10.15am local time, while its three rivals lost at least one per cent.

“Investors had been betting on them beating estimates,” said Andrew Clarke, director of trading at Mirabaud Asia Ltd. “They have, so there’s an initial sell-off as investors lock in gains. There will be buyers coming in on the back of research upgrades.”

China’s economic recovery has bolstered the firms, which control about a third of the nation’s US$36 trillion (RM153.72 trillion) of banking assets. What’s more, as interbank lenders, their interest margins have benefited from the government’s campaign against financial leverage, which has driven up the rates that banks pay to borrow from each other.

“Improvement in margin is the highlight for our results in the first half,” said Zhang Qingsong, a BoC vice-president at a media briefing. “It’s a reflection of better economic conditions as well as our own efforts to improve the mix of assets.”

Here are the banks’ secondquarter net income numbers:

BoC 57.04 billion yuan (RM37.15 billion) versus 46.42 billion yuan; ICBC: 77.2 billion yuan versus year earlier 75.45 billion yuan; AgBank: 52.9 billion yuan versus 50.46 billion yuan; CCB: 68.33 billion yuan versus 65.99 billion yuan.

The government’s develeraging efforts, renewed in earnest since the start of April, have sought to curb shadow financing and unravel the complex web of ties between Chinese lenders.

Interbank leverage fell in the first half of this year for the first time in seven years, while the value of wealth-management products, a key form of off-balance sheet financing, slumped in May by the most in a decade.

Meanwhile, demand for traditional loans increased. Banks advanced a record 8.2 trillion yuan of new lending in the first half, 12 per cent more than a year earlier, central bank data showed.

Unlike smaller lenders, which often rely on short-term borrowings from other financial institutions, the Big Four together control 40 per cent of Chinese deposits, thanks to their extensive branch networks and hundreds of millions of retail customers. That’s enabled them to provide liquidity on the interbank market, where borrowing costs have surged to the highest in two years.

BoC’s net interest margin (NIM) expanded to 1.88 per cent in the second quarter from 1.8 per cent in the first quarter. ICBC’s NIM was 2.16 per cent at the end of the first half from 2.12 per cent in March, while CCB’s margin rose to 2.14 per cent from 2.13 per cent. By contrast, smaller banks such as Bank of Ningbo Co have reported sharp contractions.

Bets that earnings of the big banks will withstand the develeraging campaign have helped their stock prices outperform smaller rivals since March. Shares of the Big Four last traded at an average of 0.8 times their estimated book value in Hong Kong, compared with a low of about 0.68 times six months ago. Bloomberg